On Brexit

Europe, a continent that midwifed the birth of globalization, foster-mothered its infancy, and nurtured it into its prime age, now seems to be retreating into its shell with increasing number of parties and movements in all its corners tilting toward protectionism. Indeed, this time it is not the globalization’s discontents, but its ardent advocates who are pushing globalization off the precipice by pulling the rug from under the EU. But why is it so?

It seems that at the heart of the idea of Europe lies a confusing conundrum. The more centralized and European it becomes, the less transparent and democratic it gets. The bigger the union, the farther away from its alienated citizens.

The forces that push for creation of a centralized union, away from the every-day business of the rank and file, inevitably lead to alienation of citizens from the centralized institutions. And perhaps the Brexit vote could be understood in light of this ever-deepening gap between European citizens and institutions.

Fortunately, the legal and institutional framework of the EU has the capacity to avoid the aforementioned dilemma by taking advantage of the principles of subsidiarity and proportionality and Meroni doctrine in its constitutional arrangements. However, the vicissitudes of crises seem to erode the importance of such counterbalancing provisions and upset this equilibrium in favor of the EU institutions vis-a-vis the Member States and their citizens.

One of the central ideas pushing for centralization at the EU level is the pronounced emphasis on the need for a unified European governance and regulation; the underlying reason being the fact that a European single market necessitates a single governance and regulation. By highlighting the gap between EU-wide governance and regulation, and European integrated markets, new policy proposals are incessantly pushing for harmonization, centralization and consolidation of regulatory regimes: a move from economic union to political union.

For example, in financial regulation, we have witnessed policies pushing for a Banking Union, which have given shape to new ideas for a single supervisory mechanism, a single resolution mechanism, a single European deposit insurance scheme (under construction), and different single rulebooks and handbooks. In stove is yet another union (i.e., the capital markets union), which will be accompanied by a whole host of new mechanisms and perhaps handbooks and rulebooks with the word single preceding them.

Although the push toward having all these single institutions in place is understandable against the backdrop of the financial and sovereign debt crisis, it seems that not only would not these single mechanisms achieve the objectives of stability and growth, but also the EU markets would be as prone to crises in the presence of such institutions as in their absence, if not more.

This is mainly because a move toward regulatory and governance harmonization and consolidation (regulatory monopoly) would diminish diversity, which can lead to lower levels of competition among different institutional forms and models. In other words, establishing an EU-wide regulatory and governance authority may contribute to heightened fragility because in a harmonized regime, which is free from the market or downward accountability, a monopolistic regulator is more likely to adopt one-size-fits-all regulatory strategies and perhaps inadvertently encourage homogeneity and correlated business strategies.

Deprived of the benefits of diversity and heterogeneity, a harmonized regulatory regime, in which the risks of regulatory and governance errors can be easily amplified, could be more prone to failure and collapse than its decentralized regulatory counterpart. A more localized and diversified regulatory and governance design, within which there is a healthy level of regulatory arbitrage, which encourages regulatory competition, would minimize the risks of catastrophic large-scale regulatory errors. Therefore, a move toward regulatory monopoly (harmonization) can hardly be justified as a mechanism for achieving stability.

However, this note is not intended to downplay the positive role of the EU in improving the lot of the EU citizens by supporting the single market and the four freedoms, nor is it an advocacy of regulatory faineance at the EU level, but it is intended to highlight the importance of principles of subsidiarity, proportionality, and deference to the virtues of local experimentation, incremental and evolutionary transformations, and leaving sufficient room for crosspollination of diverse views on important policy issues. With a tunnel vision towards centralization at the EU level, one would be reasonably wary of dreary prospects of impending great disasters as a result of a Great Leap Forward towards the Unites States of Europe.

Although the urge for betterment and perfection is a deeply-engrained human desire, it comes with huge pitfalls and perils; the perils that often remind me of Adam Smith’s recount of an epitaph on the tombstone of a perfectionist mason reading: “I was well, I wished to be better, here I am.”